The once mighty Dresdner Kleinwort Wasserstein fell far behind the leaders during the ECM recession of the last three years. But the firm has embarked on a big hiring push to catch up. Harry Wilson asks John St John, global head of ECM, how he plans to do it.
The hard frost of the last three years in the equity markets has begun to thaw, and green shoots of renewed activity are appearing.
But in the job market, spring has yet to come. Having gone through the pain of staff cuts, few firms are yet confident enough to start building up their ECM teams.
The exception is Dresdner Kleinwort Wasserstein, which in the last five months has made a series of hires at senior level.
The process started in May, when the bank recruited John St John, head of ECM at Commerzbank, to become its new global head of ECM.
An 18 year City veteran, who has previously headed ECM groups at Salomon Brothers and Lehman Brothers, St John was hired to spearhead Dresdner's recovery in the sector.
A month later, the bank brought in David Wenman higher up the ladder as global head of equity products and co-head of capital markets, reporting directly to CEO Andrew Pisker.
Along with their DrKW security passes, St John and Wenman were issued with large chequebooks. Within three months, they were using them.
In early August, St John brought in Doug Rediker - another Lehman and Salomon alumnus - from International Capital Strategies, an advisory boutique, as managing director responsible for telecoms and the EEMEA region (emerging Europe, the Middle East and Africa).
The consensus among equity bankers is that in David Wenman and John St John, Dresdner has picked an 'A' team with sound credentials.
The two men appear to have much in common. Both left investment banking in 2000 to try their hands as chief executives in the dotcom world - St John with EO plc, an online new issue platform, and Wenman with Easy2Trade, an online broker.
But more importantly, both of them have many years' experience of running European equity departments.
St John learnt his trade at Kleinwort Benson from 1988 to 1995 - he left the bank just after Dresdner bought it.
For the next three years he ran European ECM at Salomon Brothers, before moving to Lehman in 1999 to be global co-head of ECM.
Wenman's career began a little earlier, in 1980, when he joined O'Connor in Chicago. Within four years he was a partner, and in 1986 he moved to London and became head of Europe.
When the firm was taken over by Swiss Bank Corp in 1991, Wenman became head of global equity options trading in Zurich. A stint as SBC Warburg's global head of equity trading was followed by a year at Liffe as managing director, business development.
Two weeks later Ken Robins joined the firm as global head of equity-linked origination. He had left Credit Suisse First Boston in December, having previously run European equity-linked origination at CSFB and UBS.
And at the beginning of September, Wenman hired a new global head of equity derivatives - Chris Seery, a hedge fund manager for the last three years but before that head of equity derivatives sales Europe at Morgan Stanley.
Besides these big hitters, Dresdner has taken on two directors and a vice president in ECM - and St John expects to make further senior hires in the next few months.
Repairing the damage
Rival ECM bankers are a little surprised that Dresdner is making its move so early. "I think it's insane," said one head of ECM in London. "Would you want to be building up an ECM business at the moment?"
But what has startled the market most is that this confident investment is going on at Dresdner - a firm that has suffered worse than most in the equity downturn.
From the early 1990s to 2001, Kleinwort Benson and then Dresdner was an unquestioned member of the elite in European equity capital markets, featuring among the top 10 bookrunners every year except 1998.
But from 10th place in 2001, Dresdner has fallen like a stone, to 21st in 2002 and 13th in 2003 so far.
"As they say, 'all boats rise and fall on the same tide'," says John St John.
But some boats rise and fall further than others. European ECM issuance slid 63% from $232bn in 2000 to $86bn in 2001 - but DrKW's tally of deals withered by 93.5% from $9.5bn to $614m, a market share of just 0.7%.
DrKW's headcount has plummeted, too. In May the bank had only one outward facing managing director to pitch for ECM business, and a total staff of about 25.
Dresdner is determined to repair the damage. "Our main task," says St John, "is to get back an appropriate market share, considering our ranking in other areas such as M&A, research and DCM. The rest is driven by what the market is doing."
Underlying DrKW's difficult patch in the last couple of years has been rumbling uncertainty about its relationship with Allianz, the German insurance company that bought Dresdner Bank in 2001.
Straight after the takeover, many wondered whether Allianz would sell DrKW; later, it appeared more likely that Allianz would work towards floating the investment bank.
The roots of the blues
Dresdner's equity business grows out of the twin taproots of Kleinwort Benson's premier league UK corporate finance franchise and Dresdner's German banking network.
The merger of the firms in 1995 seemed to guarantee future ECM success. At the time Dresdner was the top bookrunner in Germany with 32% of the market, and Kleinwort Benson was fifth with 18.2%. Combined, their share dwarfed that of Deutsche Bank, which had 22%.
The bank led and advised on some of the most prestigious issues of the time, including the IPOs of Merck and Adidas in 1995.
But in the next three years, Deutsche outplayed Dresdner. By 1998 Deutsche had a stranglehold on German issuance with 39% of the market, while DrKB's share had shrunk to 15.5%.
Things went even worse in the UK, where Dresdner's slice of the business narrowed from 22% in 1995 to 4% by 1998.
Fortunately, the late 1990s equity bull run threw up more than enough business to keep many ECM departments profitable.
When Dresdner Bank bought the prestigious US corporate finance boutique Wasserstein Perella in September 2000, many in the group must have thought a flow of global mandates would follow.
But as with Credit Suisse's purchase of Donaldson, Lufkin and Jenrette, the results have been disappointing, and most observers believe the Eu1.7bn Dresdner paid was too much.
The merger also coincided with the collapse in the equity market and the beginning of the two year ECM freeze, from which the market has yet to fully recover.
The new Dresdner Kleinwort Wasserstein was hit especially hard by the crash, since its home markets of Germany and the UK have been particularly depressed.
Dresdner has also stumbled in mergers and acquisitions, often a good source of equity mandate. In 1997 DrKB was number five in Europe for M&A deals by value, but this position fell to 15 in 2002, and 41 in 2003 to date.
If DrKW is to build a really strong ECM business, most market participants agree it will need to improve its share of M&A business.
Doubts about the parent's commitment to investment banking surfaced again in March, when Allianz announced a Eu5bn rights issue to repair its balance sheet. Many in the financial markets had DrKW pegged as a possible candidate for disposal.
However, when Allianz announced its results in mid-August it confirmed its support for the business and satisfaction with Dresdner's performance. The statement put the lid on speculation for the time being, soothed clients and investors, and created the right background for DrKW to embark on an ambitious expansion plan in the equity market.
"When there is uncertainty about any business, competitors will take advantage of that," says St John. "As soon as you eliminate uncertainty it's much easier to do business - easier to hire people, retain people, win new clients, retain existing clients - everything is easier."
St John's new regime has made a good start. Since the end of June, Dresdner has managed rights issues for HeidelbergCement and United Utilities.
"The most important thing for DrKW is get back out there and start executing deals," says one head of ECM in London. "They need to show sustained activity."
DrKW has also started to get into the equity-linked market, leading a convertible for German sportswear firm Adidas-Salomon.
"We definitely want to build the business in this area, though it could take a while," says St John. "But I think equity-linked will continue to grow, to the extent that volatility levels remain high."
Choosing the moment
Dresdner's choice of this moment to start its growth campaign may prove to have been a wise one.
The poor new issue market has allowed the bank to hire people who would otherwise be beyond its reach. "It's been great," says St John. "There are lots of people on the street, and they're very high calibre - and you haven't had to pay astronomical sums to get them."
The recent hires have brought DrKW's ECM group up to 31 people, a headcount still lower than average for a major ECM business.
Dresdner's distinguished past in the ECM market, and its continuing strong client links, especially in Germany and the UK, will give St John a base to build on.
"It's not a build from scratch job," says St John. "I think most of the platform and brand is there, it's just a question of going out there and marketing it."
St John recognises the danger of allowing the relationships on which the business's past success was based to slip. "Some of our relationships have been allowed to go stale, and we probably haven't been as aggressively marketing ourselves as other houses have in the last few years," he says. "Yes, there is an element of team building - much more it is about refocusing the team on marketing the business."
The first objective for St John will be to get Dresdner back into the top bracket of the league tables.
"The market share drive is key," he says. "If you're outside the top 10, you become more marginal, and it becomes much more difficult to penetrate the market."
Dealogic's latest figures show that the top 10 ECM bookrunners soak up 67% of all ECM revenues globally, leaving 33% of the fee pot to be shared among all the other players.
The data company suggests Dresdner's revenue for the year so far in European ECM is Eu21.3m (14th in the market) - an improvement on 2002's year-end figure of Eu16.3m (19th), but less than a tenth of the earnings in 1999.
One of the problems facing all ECM businesses at the moment is the number of competitors in the market. Some believe there is still an excess of capacity in ECM, even after over two years of downsizing.
For Dresdner to succeed, it will have to entrench itself in key sectors where it has a competitive advantage - most importantly of all, Germany.
"DrKW has to crack Deutsche's stranglehold on Germany," said one head of ECM in London. "The question is whether Allianz will have the stamina to see this through."
Some of the key factors needed to build a strong ECM business are present in the DrKW franchise.
It has a financial backer in Allianz, which, while it has experienced financial pressure, has largely restructured its balance sheet, and, after more than three years, can now probably be relied on to stay committed to investment banking. Allianz should be able to provide the financial muscle needed to be competitive in ECM.
Dresdner also has a well-regarded equity research division, which came first in the 2003 Thomson Extel pan-European survey for its coverage of global economics and strategy.
The sales and distribution platform, too, is strong. And most importantly, it has a well-recognised brand and a clutch of blue-chip clients. While such relationships are a less reliable guarantee of business than they used to be, they can still give a firm the edge.
It will not be an easy task to bring together all the elements that will make DrKW a force in the European ECM business. As St John says, "the task is basically to build up in as short a time as possible the new issue side to match what is a very powerful platform on the research and distribution side. I would like to be clearly around the 10 mark in the European ECM league tables in 12 to 18 months - and clearly inside the top 10 within 18 to 36 months."
These are ambitious plans, but the survival of DrKW as a major ECM player is dependent upon their success.
If market conditions improve, DrKW may be well placed to take a leading role in a future pipeline of new issuance. But if ECM activity fails to improve, then DrKW, like other firms outside the top 10, may find life increasingly difficult.
For more analysis of Dresdner's recent ECM performance, see www.euroweek.com